Thursday, July 01, 2004

John Kay on property rights

Another nice article from John Kay with lessons for the governments in Indonesia, central and regional. Perhaps it's about time trumpets be sounded supporting assignments of property rights to individuals and communities to accelerate growth. Note the second part of the quote from Milton Friedman in the second paragraph which, I think, is very relevant to Indonesia. To see the failure of property rights assignments in Indonesia, one needs only to look at Jakarta traffic, with motorcyclists going against the flow of traffic, and peddlers invading pedestrians, allwith impunity.

The government's bailiffs are banging on the doors of Yukos, the Russian oil producer, while Mikhail Khodorkovsky, the billionaire behind the company, languishes in prison. Russia's bumpy road to capitalism has lessons for the development of a market economy everywhere.

In Capitalism and Freedom, the defining text on the American business model, Milton Friedman acknowledges that "what constitutes property, and what rights the ownership of property confers are complex social creations rather than self-evident propositions". He adds, more dubiously: "In many cases, the existence of a well-specified and generally accepted definition of property is far more important than just what the definition is."

Anatoly Chubais, leader of Russia's pro-market reformers, reiterated Prof Friedman's claim in blunter language. In 1995 he acknowledged that "they are stealing absolutely everything and it is impossible to stop them. But let them steal and take their property. They will then become owners and decent administrators of this property." The process Mr Chubais described reached its zenith in the shares-for-loans programme, which transferred Russia's principal resources and industrial assets to oligarchs such as Mr Khodorkovsky and ensured Boris Yeltsin's re-election as president.

The west would like to draw a veil over the origins of the property rights that were established in post-communist Russia. Western oil companies, for example, want access to Russia's huge energy reserves and the organisations that control those reserves badly need their expertise. It is convenient for our business leaders to suspend disbelief and proceed on the basis that the people with whom they deal are the Russian analogues of themselves. When investors buy Russian shares, they would like to suppose that the securities they buy have the same character as those they trade on the New York Stock Exchange.

It might be in the best interests of Russia itself, as well as those who do business with Russia, if these beliefs and expectations were well-founded. Russia might move more quickly towards a market economy if Prof Friedman's maxim could be followed: focus on ensuring the existence of a well-specified and generally accepted distribution of property rights and stop asking questions about the legitimacy of that specification of property rights and their distribution. After all, the original sources of the wealth of England's aristocracy would not bear close scrutiny. Like the fortunes of Russian oligarchs, their wealth was derived from sycophancy towards the monarchy and success in picking the winner in times of political turmoil.

But time heals many wounds. Britain's aristocracy is now only an engaging anachronism with little political power. Even so, Britain is almost the only democratic market economy in which past service at court continues to influence the distribution of wealth. Fortunes gained through service to the king were lost in the tumbrils of the French revolution, or decayed in the hyperinflations of 20th-century Germany and Austria.

The usual route to riches today is different. The fortunes of the Gates, the Waltons, the Rockefellers, however preposterously large, are associated with wealth-creating activities that brought direct benefits to millions of people. The separation of politics and economic success was the key to the simultaneous evolution of liberal democracy and the market economy.

Without such separation, both politics and business are corrupted. Democratic politics is impossible because disinterested government cannot emerge when access to state power is the principal route to private wealth. Economic growth is stunted because entrepreneurial instincts are diverted from the needs of customers to the desires of those who control the government. In the long run, Russia might have been better served by a more gradual transition, which would have given as much weight to the legitimacy of private property rights as to the speed of their establishment.

Of course, it is not just in Russia that inappropriate relations between politics and business degrade politics and distort business. Washington lobbyists are the modern version of the courtiers who crowded the palace of Versailles in search of royal favours. The health of democracy requires that they be cleared out in a more humane, but no less rigorous, manner.

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About Me

I am a student in economics. This is not to say that I'm only interested in money supply, interest rates, or exchange rates. We care about all of the things that non-economists care about - we just see them in a unique way. I am also an Indonesian - which also doesn't mean I only care about Indonesian affairs. I was just born that way.